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We are always “losing money” in this sense unless we are buying and selling the optimal assets every day. Even their example of the “winning” S&P 500 is still just an index scooping up all the big losers along with all the big winners. We diversify because we can’t pick the winning assets every time, so if you understand the benefits of diversification I feel like the drawbacks are already obvious.
I think this is more of a challenge of psychology. You need to mentally flip red numbers from “losses” to that asset class “being on sale”.
Let me explain:
- In the long run, all asset classes will see gains. We know this.
- The price of assets only matters when you buy or sell.
- We know that different asset classes are partially uncorrelated—in fact, the less correlated the better.
Take those three points together and you’ll realize that rebalancing a portfolio to sell off “winners” to buy “losers” is actually optimal. In the long run, the asset classes will see their average long-term returns, but when you rebalance, you’re always selling high and buying low. And those assets you pick up “on sale” will, on average, outperform.
The less popular view I have is to keep 0% cash and 0% bonds on long investment horizons, which means all retirement funds. Even when you retire, you still will be drawing down for a long time. Long enough for stocks to outperform.
